Pricing Barrier and Average Options under Stochastic Volatility Environment
AbstractThis paper proposes a new approximation method of pricing barrier and average options under stochastic volatility environment by applying an asymptotic expansion approach. In particular, a high-order expansion scheme for general multi-dimensional diffusion processes is effectively applied. Moreover, the paper combines a static hedging method with the asymptotic expansion method for pricing barrier options. Finally, numerical examples show that the fourth or fifth-order asymptotic expansion scheme provides sufficiently accurate approximations under the lambda-SABR and SABR models.
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Bibliographic InfoPaper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-176.
Length: 22 pages
Date of creation: Oct 2009
Date of revision: May 2010
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